The Cable Bundle And Thompson’s Aggregation Theory

By Matt Roberts

7 min read

We don’t know the financial details. We don’t know what traditional TV or OTT options will look like in 2019. And we certainly don’t know what the future holds all the way out to 2036. What we do know is the ACC and ESPN have joined hands for the long haul. While the new deal will help to reinforce some key underpinnings of the cable bundle and ESPN’s position of strength if future digital pivots are needed, for the purpose of this piece, it’s more of an important side note than the focus and builds upon my most recent ADU entry, “The Importance of TV Advertising Trends, Scarcity and Sports.” This effort should shed more light below the surface on both sides of, “What does the future hold for traditional TV and the cable bundle?”

Let’s start with a bit of review and some new tenants from Stratechery’s Ben Thompson and James Allworth in a June 24th podcast titled, “The Old World Order.”

(1:25) Thompson believes the cable bundle is “stickier” than most think, even though the linear TV experience “seems to suck, there are actually important advantages to it.” Allworth responds with clarification on how people misunderstand the user interface, literally the first touch point for consumers on any system (how do I know what’s available to watch and how do I find it?) as the same thing as the user experience, which they’re not. But, the user interface can continue to be as clunky as cable “because of the totality of what it can do” (why doesn’t your system already know what you want to watch when you turn it on given all the viewing habit data it could be collecting?).

(10:52) Thompson runs through why national TV advertising and national brands (think: CPGs, Unilever/P&G mega-brands, auto, entertainment, financial) can only achieve message and scale via TV precisely because that’s exactly their distribution model. The two play into each other: achieving national scale on shelf space for brands equals the need to achieve national brand identification that can historically only be achieved most effectively via national TV advertising. The Top 25 national TV advertisers are dominated by these types of brands. Their existence is dependent upon national TV advertising and as Thompson posits, vice versa. “These are relatively low-margin products where your goal is to get loyal purchases for life. Proctor & Gamble makes their money through the lifetime value of acquiring a customer and then buy the same laundry detergent forever, basically…TV is better than any alternative we’ve come across (in converting customers)…TV is still better at shifting sentiment over time than any other medium. It works. It’s proven out.”

(26:13) Not everything is perfect for the cable bundle in this framework. Allworth points to newspaper as the last big shift in advertising dollars and similarly, the TV/the cable bundle and mega-brands are so intertwined that if one starts to really decline (cord-cutting/cord-nevers for TV/cable & the eCommerce challenge for the shelf space of brands), the whole ecosystem could crash. Thompson on eCommerce: “The middle is getting eviscerated everywhere. Either you’re super targeted and highly differentiated or you have massive scale and all these companies that compete on massive scale are getting outscaled by Amazon.” Allworth closes this section by naming Macy’s as one company significantly downgraded as its business model was so connected to newspaper advertising.

(30:30) While there are certainly some Top 25 advertisers who don’t spend money on sports since they’re looking for homemakers, what about an industry like automotive that pours big cash into sports? Thompson points to fundamental shifts in that industry – Tesla’s direct to consumer sales, a potential Apple Car, as well as Uber’s on-demand growth – that could certainly impact the symbiotic relationship between big transportation brands and TV advertising.

(35:35) Thompson: “What I think is going to happen…it’s not that brand advertising is going to shift from TV to digital and then TV is going to kind of wither. It’s that this sort of intertwining edifice that is advertising and the advertisers that are on TV, they’re all intertwined and work together. They’re going to teeter on and teeter on and then one day the entire thing is going to collapse and it’s going to happen really suddenly and fast. And it’s going to collapse, not just because of TV, but because every part of the edifice has been rotted out from the inside.”

(36:15) Allworth asks what Thompson would do if he were a TV executive given the current paradigm? Thompson fully defends the acquisition of premier content and actually mentions the recent Big Ten-ESPN deal, “People don’t watch ESPN because of the talent. They watch ESPN because of the high profile sporting games. Yes, ESPN is cutting costs, but they’re cutting costs in a very deliberate sort of way.” Thompson continues on why Netflix could be the game changer as they continue to aggregate more rights, though sports is a big hole. Allworth then hits on arguably the most important tenant for our purposes, “You basically need to have enough differentiated content that people demand you, that even if you lose your underlying economics from advertisers going away, you will still find another mechanism to survive.”

The pair talk for another 20-plus minutes on the future of Netflix and individual shows that have done well in the OTT environment because of depth of consumer engagement, not scale. But, Allworth’s last point is the perfect opportunity to detail Thompson’s Aggregation Theory:The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. In the pre-Internet era, the latter depended on controlling distribution.

And it’s precisely Disney/ABC/ESPN’s attempt at a horizontal monopoly, though the acquisition of the most attractive sports rights, that Thompson says it’s best positioned to profit from the rights, no matter where they’re broadcast. From last August’s “Why Disney and ESPN Will Be OK”:

For now, Iger and ESPN are emphasizing digital content as an addition to the bundled network, but in my estimation ESPN is far better positioned for a world where they must go over the top to consumers than people give them credit for. The afore-linked Wall Street Journal article said that in order to maintain current revenue levels, ESPN would need to charge $30/subscriber if the company abandoned the pay-TV bundle, which implies a customer base of ~20 million people. That’s a little over 20% of ESPN’s current pay-TV subscriber base, and if ESPN really does have all the sports that matter, I think it’s a very realistic target.

Compare Thompson’s belief to what North Carolina Athletic Director, Bubba Cunningham, told the Raleigh News & Observer’s Andrew Carter over the weekend on the new ACC-ESPN deal, “All the questions and debate about live content, whether it’s through a cable subscription, a computer, a mobile device – I don’t know. I do know our rights holder (ESPN) will figure out a way to deliver our content to the consumer.”

Just because Thompson and Cunningham are in the same boat here doesn’t make it the right one. Looking past ESPN’s subscriber losses would be far-sighted. Fox Sports personality Clay Travis is one notable name who’s not, “By 2019, ESPN will have lost another 10 million subscribers. Doubt they ever launch ACC Network as channel.” But, so too would taking the cord-cutters/nevers/slicers/skinny bundler figures and extrapolating them out. Extrapolation bias is simply taking recent trends and expecting them to continue unabated into the future. Wasserman Managing Executive for Global Sports Media Rights, Dean Jordan, who had a major role in the ACC-ESPN pact, from an interview on Thursday with WRALSportsFan.com’s Joe Ovies, “…there isn’t an OTT model that’s proven successful yet. Even ones that are ‘successful,’ are not what they thought they would be and those have been sports. The closest OTT thing that’s been a success that has sports as part of it has been Sling TV with ESPN. You have that, but I have yet to have known a major sporting event that’s been streamed where you haven’t seen some complaints about buffering.” Jordan continued by pointing to data that he says shows even Millennials eventually subscribe to the traditional cable bundle around key life moments like getting married, buying a new house & having children.

And most importantly, we do know that the current state of sports on TV and the traditional cable bundle is a multi-faceted and ever-developing landscape. Hopefully, this review connects some dots below the surface with those at the top and helps to build your knowledge base on the subject.

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